Record tax hike isn't fixing Illinois' problems

$7 billion windfall can't stave off pension crisis, health care cuts and slashes in service — all being tackled this week

May 28, 2012|By Monique Garcia, Chicago Tribune reporter

Sen. Matt Murphy, R-Palatine: “We have very tough, painful decisions to make even after the largest tax increase.” (E. Jason Wambsgans, Chicago Tribune)

Sixteen months ago, Democrats pushed through the largest income tax increase in Illinois history, an unpopular decision that was billed as a crucial step to put state government on the road to financial recovery.

Yet last week lawmakers made deep cuts in health care for the poor, and this week they face tough votes to raise the cigarette tax, strip away public worker pension benefits and slice spending on social services. Despite all that, the giant pile of unpaid bills that has loomed over state government for years is expected to keep growing.

So why didn't the roughly $7 billion more a year the state is collecting from that income tax hike fix Illinois' money problems?

Pension payments continue to increase dramatically each year. The same is true for health care costs as more people seek coverage during a down economy. And that stack of bills keeps rolling over from one year to the next partly because lawmakers declined to go along with Gov.Pat Quinn'srequest to use some of the income tax windfall to borrow to pay it off.

The rising costs have created what Quinn calls a "squeeze" on the rest of the state budget. Which means lawmakers head into the final days before Thursday's scheduled adjournment preparing to anger public employee unions, educators, mental health advocates and other groups that rely on tax money to provide services.

They're difficult moves to make in any year, not to mention one in which every House and Senate seat is on the November ballot. The governor acknowledges the drastic cutbacks are a lot to ask on the heels of a 67 percent increase in the personal income tax rate but says the sacrifices are necessary to protect the future of Illinois.

"Our state is at a crossroads," Quinn said at a recent speech before the City Club of Chicago. "I have to do the things that are necessary to make Illinois a better state, a better economy. We've done some hard things, and we'll continue to push our shoulder to the wheel because we have to do that if we're going to be strong in the 21st century."

Republican Sen. Matt Murphy of Palatine put the blame on years of overspending by Democrats who have controlled the Capitol since 2003. Murphy said years of skipped pension payments and expanding Medicaid eligibility dug a budget hole so deep that the tax increase couldn't fill it.

"The chickens are coming home to roost," Murphy said. "So now we have very tough, painful decisions to make even after the largest tax increase in state history. And that's frankly because of a lack of fiscal discipline for the last decade in this Capitol."

Quinn aides are quick to note that Democrats alone didn't create the pension problem. They point to a 1995 pension law passed under Republican Gov. Jim Edgar. Billed as a way to stabilize the pension system and get it 90 percent funded by 2045, the law backloaded pension payments so that they were minimal in early years but increased over time.

The state now finds itself in the midst of those years with increased pension costs. Quinn budget director Jerry Stermer calls the payment plan "fiscal suicide." He notes the state's required contribution has nearly tripled: going from $1.71 billion in the 2008 budget year to $5.09 billion in the budget year that starts July 1. Meanwhile, the retirement system's $83 billion unfunded liability continues to grow because of early retirement incentives, pension sweeteners and skipped payments orchestrated by Democrats and Republican.

"The truth is lawmakers have shortchanged the pensions for decades," said Kelly Kraft, spokeswoman for Quinn's budget office. "This is why we face such a challenge today."

Similar mismanagement of the Medicaid program has led it to the brink of collapse, including years of not setting aside enough money as costs continued to grow. Then-Gov. Rod Blagojevich embarked on large expansions of health coverage, and little was done to control costs that Stermer said rose on average 6 percent a year.

Those health care cost increases are untenable when the state is expected to bring in at best 2 percent more next year, Stermer said. Add nearly $2 billion in Medicaid bills that lawmakers put off paying last year, and it's created a situation in which Quinn said the health care program is drowning "under an ocean of debt."

Last week, the General Assembly voted to cut $1.6 billion in Medicaid spending. The House also approved a $1-a-pack cigarette tax increase that the Senate is expected to approve as soon as Monday.

Even if Medicaid cuts and pension reforms are put in place, the state's unpaid bills are expected to total $8.5 billion come June 30. The new state budget isn't expected to shave much off that tab. The pile of bills was an estimated $8 billion when the income tax hike was approved.